Don’t let the IRS take a third of your self-published royalties. Simon Whaley takes you step-by-step through the IRS tax interview process.
No business likes giving away 30% of its income when it doesn’t have to, and that applies to your writing business too. If you’ve opened your first self-published royalty statement to discover 30% of your income has been withheld, you need to act now to stop it happening in the future.
It’s all down to the American Inland Revenue Service (IRS), which requires American companies to withhold 30% of any income earned through them by non-US citizens.
Most of us who self-publish do so via an American-based organisation, such as Amazon, Smashwords, Apple, or Draft2Digital. This means they all have to adhere to IRS regulations. Unless you’ve told these organisations to the contrary, they assume you owe the IRS tax on this royalty income that you’ve earned.
Luckily for us, the American IRS has international treaties that allow citizens in some countries to receive all (or most) of their royalties earned through these American companies without having any monies withheld. These treaties insist that the beneficiaries of that income (the writers) will ultimately pay tax on that income in the country where they live instead.
The UK benefits from such a treaty, and so we can apply to have our royalties paid out in full, with no tax withheld.
The treaties vary from country to country, so if you are based in another country for tax purposes you may find a different rate applies to you. For example, Australian writers will find the IRS still withholds 5% of their royalties, Portuguese authors have 10% withheld and Indian writers are subject to a 15% withholding.
By default, most self-publishing companies (Amazon, Draft2Digital, Smashwords, etc) have to assume you are subject to the 30% withholding tax unless you tell them otherwise. Ideally, you should do this when you first create your account with any of these American-based businesses. But if you haven’t already done so, you can do so now.
It involves undertaking a tax interview, which is not as frightening as it seems. The interview consists of a few questions, which you answer via an online form, and it should take no longer than five minutes.
If you publish exclusively via Amazon then you only need to undertake the tax interview with Amazon. If you use a distributor, like Smashwords or Draft2Digital, then you’ll need to complete the tax interview again via their systems. If you publish directly through individual platforms, such as Apple, Barnes and Noble, etc, you will need to complete a tax interview for each of those platforms too.
As most self-published writers start with Amazon, I’ll go through the tax interview as it appears on the Amazon platform. It’s a similar process on the other platforms.
The interview begins by seeking information about what type of organisation will be receiving the royalties, and then whether that organisation or person is based in the United States.
The business setup for many writers, particularly self-published ones, is as a sole trader. When you fill in your annual self-assessment forms for Her Majesty’s Revenue and Customs (HMRC) you’ll complete the self-employed pages with the income and expenditure for your writing business. More successful writers may have a different business set up, such as a limited company. However, for most writers, you’ll need to select the Individual or Sole Proprietor option on the tax interview.
The next question asks if you are a US entity, US citizen or resident. Therefore, if you are NOT an American company, an American citizen (who may be living in another country), or currently resident in America, then tick No.
Having established that you’re not based in the USA, you’re then asked to select your country of residence, or your country of residence for tax purposes (if this is different from your country of residence).
The interview then requests some personal information, including your name, address and date of birth. Use your real name, not a pen name or pseudonym, when completing these details.
Always quote your full name, especially if the HMRC uses any middle names you may have when corresponding with you.
Next, you’re asked if you are acting as an intermediary. Most self-published writers should select Nobecause any royalties you earn are yours. An intermediary is someone who collects the income to distribute to others (such as a publisher, for example).
What now follows is a test to double-check that you are completing the correct form. The IRS asks the platforms to confirm that you are not a US citizen. It does so by asking you to tick the box if any of the following statements are true:
I have a valid US passport,
- I was born in the US and have not renounced my rights,
- I hold a valid Green Card,
- I have spent time in the US in the past three years.
If any of those statements are true, then the interview will end and you will need to start again, completing it as a US citizen. For most of us, none of those statements applies, so we should leave them all blank.
The next section is where many writers get confused because the forms are not particularly clear on what tax reference numbers are required. We need to enter a personal tax identification number (TIN). Before we do so, we’re asked to identify which sort of tax identification number we have, from four possible options:
- I have a US TIN,
- I have a foreign (Non-US) income tax identification number,
- I have both a US TIN and a foreign (non-US) income tax identification number,
- I do not have a US TIN or a foreign (non-US) income tax identification number.
The IRS will only allow royalties to be paid gross, without any withholding tax being applied, if a tax identification number is provided.
Select the second option to confirm that you have a foreign (non-US) income tax identification number.
The interview then confirms that the UK has a double tax treaty with the USA, and so we’re entitled to receive our royalties without any deduction. We’re asked to confirm our country of residence again.
It’s now time to enter our Foreign TIN or Tax Information Number. We have two options here. We can enter either our National Insurance number (two letters, six numbers and then one letter) or we can use our ten-digit Unique Tax Reference (UTR) which can be found on most correspondence we may have with the HMRC.
Whichever you use, ensure the name you’ve completed with this tax interview matches the name the HMRC (or your local tax authority) has against that tax identification number.
To proceed, it’s necessary to tick another checkbox to confirm that the TIN is correct.
Essentially, that’s it! All that remains is to review the information you have provided to confirm its correctness.
Before that, you’ll see a statement confirming what the withholding rate will apply based upon the information you have provided. Under current tax arrangements with the UK, the withholding rate is 0%, so your royalty payments will be paid to you in full.
If the tax rate you see is not what you were expecting then go back and review your answers. It may be that you’ve missed a question and not completed all of the information you needed to.
What follows is a pre-populated IRS W-8BEN form showing all of the information you’ve entered. You must check the information displayed is correct.
If anything is incorrect you can either use the Previous button on the screen to go back or click the Exit Interview Without Saving button, which will terminate the interview. You can then start again from the beginning, if you wish.
The IRS will issue a form 1042-S each year, which confirms the tax rate that has been applied to the income you’ve earned through each platform. You should retain this with all of your other tax documentation.
Most platforms give you the option to receive this electronically or have a paper copy posted to you. Electronic versions are provided in PDF format and are either emailed directly, or you are advised by email when they’re available to download from your account on whichever platform you’re using.
Before finishing the interview, you need to formally sign your tax declaration to confirm the information is correct. You can opt to do this on paper, in which case you will need to download the form and print it out for you to sign and return. Remember that your royalties will continue to have withholding tax deducted until your signed forms have been reviewed and confirmed by the relevant platform.
Alternatively, you can sign the form electronically. This means ticking a selection of boxes to confirm the information is correct. Then you sign it by typing in your full name, your email address, and the capacity in which you are signing, which for most of us is as an Individual.
Click on the Submit button and, if everything is correct, you’ll see your completed W-8BEN form displayed on screen again. There’s an option to print this out before exiting the interview.
If you’re unsure about any of the answers you need to provide during the interview then seek professional financial help. Chat to your accountant or financial advisor.
Every few years, you’ll be asked to undertake the tax interview again, to ensure that the information is still correct and up-to-date and that nothing has changed.
Few enjoy dealing with the tax authorities, let alone foreign-based ones. But whatever you do, don’t put off this simple process. This five-minute interview could boost your writing business income by up to thirty per cent.
IRS Guidance on how to complete a Form W-8BEN: www.irs.gov/pub/irs-pdf/iw8ben.pdf
For a full list of countries with US Income Tax Treaties, see: https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z